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EXCEL - IDEA: XBRL DOCUMENT - TOR MINERALS INTERNATIONAL INCFinancial_Report.xls
EX-10 - EXHIBIT 10.2 - BANKING FACILITY - TMM & HSBC - TOR MINERALS INTERNATIONAL INCexhibit10hsbc1.htm
EX-31 - EXHIBIT 31.1 - CEO CERTIFICATION - TOR MINERALS INTERNATIONAL INCceo31-1.htm
EX-32 - EXHIBIT 32.2 - CFO CERTIFICATION - TOR MINERALS INTERNATIONAL INCcfo32-2.htm
EX-32 - EXHIBIT 32.1 - CEO CERTIFICATION - TOR MINERALS INTERNATIONAL INCceo32-1.htm
EX-31 - EXHIBIT 31.2 - CFO CERTIFICATION - TOR MINERALS INTERNATIONAL INCcfo31-2.htm
EX-10 - EXHIBIT 10.1 - BANKING FACILITY - TMM & RHB - TOR MINERALS INTERNATIONAL INCexhibit10rhb1.htm

United States
Securities and Exchange Commission
Washington, D. C.  20549

____________________________

FORM 10-Q
____________________________

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2014

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________


Commission file number 0-17321

TOR MINERALS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

74-2081929
(I.R.S. Employer Identification No.)

722 Burleson Street, Corpus Christi, Texas  78402
(Address of principal executive offices)

 

(361) 883-5591
(Registrant’s telephone number, including area code)
____________________________


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý

No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
Common Stock, $1.25 par value

Shares Outstanding as of October 31, 2014
3,014,022

1



Table of Contents

 

Part I - Financial Information

Page No.

Item 1.

Condensed Consolidated Financial Statements

Condensed Consolidated Income Statements  --
Three and nine months ended September 30, 2014 and 2013

3

Condensed Consolidated Statements of Comprehensive Income (Loss) --
Three and nine months ended September 30, 2014 and 2013

4

Condensed Consolidated Balance Sheets --
September 30, 2014 and December 31, 2013

5

Condensed Consolidated Statements of Cash Flows --
nine months ended September 30, 2014 and 2013

6

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition
and Results of Operations

16

Item 4.

Controls and Procedures

29

Part II - Other Information

Item 6.

Exhibits

30

Signatures

30

Forward Looking Information

Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of TOR Minerals International, Inc. (the “Company”).  The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company’s products, changes in competition, economic conditions, fluctuations in market price for Titanium dioxide pigments, changes in foreign currency exchange rates, increases in the price of energy and raw materials, such as ilmenite, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company’s business, and other risks indicated in the Company’s filings with the Securities and Exchange Commission.  These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.  The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.  When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

2



TOR Minerals International, Inc. and Subsidiaries

Condensed Consolidated Income Statements

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 Three Months
Ended September 30,

 

 Nine Months
Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

NET SALES

$

11,317 

$

10,870 

$

36,841 

$

33,029 

Cost of sales

9,809 

9,289 

31,674 

28,242 

GROSS MARGIN

 

1,508 

 

1,581 

 

5,167 

 

4,787 

Technical services and research and development

50 

135 

150 

459 

Selling, general and administrative expenses

1,092 

1,119 

3,319 

3,644 

Loss on disposal of assets

10 

OPERATING INCOME

 

366 

 

327 

 

1,698 

 

674 

OTHER INCOME (EXPENSE):

Interest expense, net

(85)

(103)

(275)

(286)

Gain (Loss) on foreign currency exchange rate

71 

(84)

10 

(151)

Other, net

10 

18 

Total Other Expense

(9)

(181)

(255)

(419)

INCOME BEFORE INCOME TAX

 

357 

 

146 

 

1,443 

 

255 

Income tax expense

61 

33 

287 

67 

NET INCOME

$

296 

$

113 

$

1,156 

$

188 

 

 

 

 

 

 

 

 

 

Earnings per common share:

Basic

$

0.10 

$

0.04 

$

0.38 

$

0.06 

Diluted

$

0.09 

$

0.03 

$

0.34 

$

0.06 

Weighted average common shares outstanding:

Basic

3,014 

3,012 

3,014 

2,999 

Diluted

3,394 

3,422 

3,403 

3,271 

See accompanying notes.

3



TOR Minerals International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

 

 

 

 Three Months
Ended September 30,

 

 Nine Months
Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

NET INCOME

$

296 

$

113 

$

1,156 

$

188 

OTHER COMPREHENSIVE LOSS, net of tax

Currency translation adjustment, net of tax:

Net foreign currency translation adjustment losses

(1,021)

(265)

(729)

(951)

Other comprehensive loss, net of tax

(1,021)

(265)

(729)

(951)

COMPREHENSIVE INCOME (LOSS)

$

(725)

$

(152)

$

427 

$

(763)

See accompanying notes.

4



TOR Minerals International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

 

September 30,
2014

 

December 31,
2013

 

 

(Unaudited)

 

 

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

 $

2,736 

 $

2,920 

Trade accounts receivable, net

5,871 

4,526 

Inventories, net

20,487 

20,753 

Other current assets

965 

596 

Total current assets

30,059 

28,795 

PROPERTY, PLANT AND EQUIPMENT, net

21,957 

23,799 

OTHER ASSETS

23 

23 

Total Assets

 $

52,039 

 $

52,617 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable

 $

4,914 

 $

3,279 

Accrued expenses

1,848 

1,397 

Notes payable under lines of credit

425 

1,477 

Export credit refinancing facility

2,330 

3,866 

Current deferred tax liability

17 

66 

Current maturities - capital leases

-   

12 

Current maturities of long-term debt – financial institutions

1,159 

1,040 

Total current liabilities

10,693 

11,137 

LONG-TERM DEBT - FINANCIAL INSTITUTIONS

2,008 

2,918 

DEFERRED TAX LIABILITY

257 

18 

Total liabilities

12,958 

14,073 

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:

Common stock $1.25 par value: authorized, 6,000 shares;
3,014 shares issued and outstanding at September 30, 2014 and
3,012 shares issued and outstanding at December 31, 2013

3,767 

3,765 

Additional paid-in capital

29,473 

29,365 

Retained earnings

2,809 

1,653 

Accumulated other comprehensive income:

Cumulative translation adjustment

3,032 

3,761 

Total shareholders' equity

39,081 

38,544 

Total Liabilities and Shareholders' Equity

 $

52,039 

 $

52,617 

See accompanying notes.

5



TOR Minerals International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Nine Months Ended September 30,

2014

 

2013

CASH FLOWS FROM OPERATING ACTIVITIES:

 

Net Income

 $

1,156 

 $

188 

Adjustments to reconcile net income to net cash
provided by (used in) operating activities:

Depreciation

2,570 

2,355 

Loss on disposal of assets

10 

Stock-based compensation

100 

85 

Deferred income tax expense (benefit)

189 

(123)

Change in inventory reserve

(174)

(15)

Provision for bad debts

(7)

Changes in working capital:

Trade accounts receivables

(1,411)

(903)

Inventories

343 

(4,996)

Other current assets

(381)

814 

Accounts payable and accrued expenses

2,223 

1,135 

Net cash provided by (used in) operating activities

4,608 

(1,447)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Additions to property, plant and equipment

(1,386)

(3,529)

Proceeds from sales of property, plant and equipment

Net cash used in investing activities

(1,386)

(3,527)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

Net (payments on) proceeds from lines of credit

(965)

804 

Net (payments on) proceeds from export credit refinancing facility

(1,532)

3,600 

Payments on capital leases

(11)

(30)

Proceeds from long-term bank debt

236 

276 

Payments on long-term bank debt

(947)

(815)

Proceeds from the issuance of common stock
and exercise of common stock options

11 

267 

Net cash (used in) provided by financing activities

(3,208)

4,102 

Effect of foreign currency exchange rate fluctuations on cash and cash equivalents

(198)

(128)

Net decrease in cash and cash equivalents

(184)

(1,000)

Cash and cash equivalents at beginning of period

2,920 

2,799 

Cash and cash equivalents at end of period

 $

2,736 

 $

1,799 

Supplemental cash flow disclosures:

 

Interest paid

 $

275 

 $

286 

Income taxes paid

 $

78 

 $

214 

See accompanying notes.

6



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 1.

Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”).  The interim condensed consolidated financial statements include the consolidated accounts of TOR Minerals International, Inc. (“TOR”, “we”, “us”, “our” or the “Company”) and its wholly-owned subsidiaries, TOR Processing and Trade, BV (“TPT”) and TOR Minerals Malaysia, Sdn. Bhd. (“TMM”) with all significant intercompany transactions eliminated.  In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the consolidated financial position, results of operations and cash flows for the interim periods presented have been made.  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations.  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, in our Annual Report on Form 10-K filed with the SEC on March 10, 2014.  Operating results for the three and nine month periods ended September 30, 2014, are not necessarily indicative of the results for the year ending December 31, 2014.

Income Taxes

The Company records income taxes using the liability method.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Income taxes consisted of federal and state income tax expense of approximately $163,000 and $2,000, respectively, and foreign tax benefit of approximately $104,000 for the three month period ended September 30, 2014, as compared to a federal tax benefit of approximately $103,000 and state income tax expense of approximately $2,000 and foreign tax expense of approximately $134,000 for the same three month period in 2013.

For the nine month period ended September 30, 2014, income taxes consisted of federal and state income tax expense of approximately $220,000 and $7,000, respectively, and foreign tax expense of approximately $60,000, as compared to a federal tax benefit of approximately $88,000 and state income tax expense of approximately $7,000 and foreign tax expense of approximately $148,000 for the same nine month period in 2013.  Taxes are based on an estimated annualized consolidated effective rate of 19.9% for the year ended December 31, 2014.

When accounting for uncertainties in income taxes, we evaluate all tax years still subject to potential audit under the applicable state, federal and foreign income tax laws.  We are subject to taxation in the United States, Malaysia and The Netherlands.  Our federal income tax returns in the United States are subject to examination for the tax years ended December 31, 2011 through December 31, 2013.  Our state return, which is filed in Texas, is subject to examination for the tax years ended December 31, 2009 through December 31, 2013.  Our tax returns in various non-U.S. jurisdictions are subject to examination for various tax years dating back to December 31, 2008.

 

As of January 1, 2014, we did not have any unrecognized tax benefits and there was no change during the nine month period ended September 30, 2014.  In addition, we did not recognize any interest and penalties in our condensed consolidated financial statements during the three and nine month periods ended September 30, 2014.  If any interest or penalties related to any income tax liabilities are imposed in future reporting periods, we expect to record both of these items as components of income tax expense.

7



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 2.

Debt and Notes Payable

Long-term Debt – Financial Institutions

Following is a summary of our long-term debt to financial institutions as of September 30, 2014 and December 31, 2013, in thousands:

 September 30,

2014

 December 31,

 (Unaudited)

2013

Fixed Rate term note payable to a U.S. bank, with an interest rate of 5.5% at September 30, 2014, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of our U.S. operation.

 $

595 

 $

911 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.85% at September 30, 2014, due July 1, 2029, secured by TPT's land and office building purchased July 2004.  (€240)

304 

351 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.3% at September 30, 2014, due January 31, 2030, secured by TPT's land and building purchased January 2005.  (€266)

337 

386 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2014, due July 31, 2015, secured by TPT's assets.  (€21)

26 

80 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.25% at September 30, 2014. Paid in full on June 30, 2014.

139 

Malaysian Ringgit term note payable to a Malaysian bank, with a fixed interest rate of 5.2% at September 30, 2014, due March 1, 2015, secured by TMM's property, plant and equipment. (RM 1,750)

533 

801 

Malaysian Ringgit term note payable to a Malaysian bank, with a fixed interest rate of 5.2% at September 30, 2014, due October 25, 2018, secured by TMM's property, plant and equipment. (RM 4,500)

1,372 

1,290 

Total

3,167 

3,958 

Less current maturities

1,159 

1,040 

Total long-term debt - financial institutions

 $

2,008 

 $

2,918 

8



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 Short-term Debt

U.S. Operations

On December 31, 2010, the Company entered into a credit agreement, as amended, (the “Agreement”) with American Bank, N.A. (the “Lender”) which established a $1,000,000 line of credit (the “Line”), and on March 1, 2012, the Line was increased from $1,000,000 to $2,000,000.  On May 15, 2013, the Company and the Lender entered into the second amendment which reduced the minimum interest rate floor on the Line from 5.5% to 4.5%.

 

On January 14, 2014, the Company entered into the third amendment (the “Third Amendment”) with the Lender.  Under the terms of the Third Amendment, the Company is required to maintain a ratio of cash flow to debt service of 1.0 to 1.0 for the four month period ended April 30, 2014, six month period ending June 30, 2014, nine month period ending September 30, 2014, and twelve month period ending December 31, 2014.  Thereafter, the required ratio of cash flow to debt service shall be 1.25 to 1.0 measured on a rolling four quarter basis as originally detailed in the Agreement.  The Company was in compliance with the ratio of cash flow to debt service for  the nine month period ended September 30, 2014.

 

On August 1, 2014, the Company and the Lender entered into the fourth amendment which extended the maturity date on the Line from October 15, 2014 to October 15, 2015 and released as collateral the $350,000 certificate of deposit pledged as additional security in the Third Amendment to the agreement.  Under the terms of the Agreement, as amended, the amount the Company is entitled to borrow under the Line is subject to a defined borrowing base, which is based on the Company’s eligible accounts receivable and inventory.  Amounts advanced under the Line bear interest at a variable rate equal to one percent per annum point above the Wall Street Journal Prime Rate as such prime rate changes from time to time, with a minimum floor rate of 4.5%.  At September 30, 2014, no funds were outstanding on the Line.

European Operations

On March 20, 2007, our subsidiary, TPT, entered into a short-term credit facility (the “Credit Facility”) with Rabobank which increased TPT’s line of credit from €650,000 to €1,100,000.  The Credit Facility was renewed on January 1, 2010 and has no stated maturity date.  The Credit Facility, which has a variable interest rate of bank prime plus 2.8% (currently at 3.316%), is secured by TPT’s accounts receivable and inventory.  At September 30, 2014, TPT had utilized €53,000 ($68,000) of its short-term Credit Facility.

TPT’s loan agreements covering both the Credit Facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of Rabobank, there are adverse changes in our business.  We believe that such subjective acceleration clauses are customary in The Netherlands for such borrowings.  However, if demand is made by Rabobank, we may be unable to refinance the demanded indebtedness, in which case Rabobank could foreclose on the assets of TPT.

9



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Asian Operations

On August 31, 2014, our subsidiary, TMM, amended its banking facility with HSBC Bank of Malaysia Berhad (“HSBC”) to extend the maturity date from April 30, 2014 to June 30, 2015.  The HSBC facility includes the following in RM:  (1) overdraft of RM 500,000 ($152,000); (2) an import/export line (“ECR”) of RM 10,460,000 ($3,188,000; and (3) a foreign exchange contract limit of RM 5,000,000 ($1,524,000).

On August 15, 2014, TMM amended its banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date from March 24, 2014 to April 1, 2015.  The RHB facility includes the following:  (1) an overdraft line of credit up to RM 1,000,000 ($304,000); (2) an ECR of RM 7,300,000 (2,225,000); (3) a bank guarantee of RM 1,200,000 ($365,000); and (4) a foreign exchange contract limit of RM 25,000,000 ($7,621,000).  At September 30, 2014, the outstanding balance on the foreign exchange contract was RM 1,172,000 ($357,000) at a current interest rate of 2.20%.

The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad.  The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments.  At September 30, 2014, the outstanding balance on the ECR facilities was RM 7,645,000 ($2,330,000) at a current interest rate of 5.2%.

The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time.  We believe such a demand provision is customary in Malaysia for such facilities.  The loan agreements are secured by TMM’s property, plant and equipment.  However, if demand is made by HSBC or RHB, we may be unable to refinance the demanded indebtedness, in which case, the lenders could foreclose on the assets of TMM.  The credit facilities prohibit TMM from paying dividends, and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.

10



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 3.

Fair Value Measurements

The following table summarizes the valuation of our financial instruments recorded on a fair value basis as of September 30, 2014 and December 31, 2013, in thousands.  The Company did not hold any non-financial assets and/or non-financial liabilities subject to fair value measurements at September 30, 2014 or at December 31, 2013.

 

 

Fair Value Measurements

Total

 

Quoted Prices
in Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Current Liability

 

 

 

 

 

 

 

 

September 30, 2014

 

 

 

 

 

 

 

 

Currency forward contracts

 $

21 

 $

 $

21 

 $

December 31, 2013

 

 

 

 

 

 

 

 

Currency forward contracts

 $

14 

 $

 $

14 

 $


Our foreign currency derivative financial instruments mitigate foreign currency exchange risks and include forward contracts.  The forward contracts are marked-to-market at each balance sheet date with any resulting gain or loss recognized in income as part of the gain or loss on foreign currency exchange rate included under “Other Expense” on the Company’s condensed consolidated income statements.  The fair value of the currency forward contracts is determined using Level 2 inputs based on the currency rate in effect at the end of the reporting period.

The fair value of the Company’s debt is based on estimates using standard pricing models and Level 2 inputs, including the Company’s estimated borrowing rate, that take into account the present value of future cash flows as of the condensed consolidated balance sheet date.  The computation of the fair value of these instruments is performed by the Company.  The carrying amounts and estimated fair values of the Company’s long-term debt, including current maturities, are summarized below, in thousands:


 

September 30, 2014

 

December 31, 2013

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

Long-term debt, including
current portion

 $

3,167 

 $

2,977 

 $

3,958 

 $

3,697 


The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, trade receivables, payables and accrued liabilities, accrued income taxes and short-term borrowings approximate fair values due to the short term nature of these instruments, accordingly, these items have been excluded from the above table.

11



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 4.

Capital Leases

On September 4, 2011, TPT entered into a financial lease agreement with Diependael Leasing, BV for equipment related to the production of ALUPREM.  The cost of the equipment under the capital lease, in the amount of approximately €38,360 ($52,500), is included in the condensed consolidated balance sheets as property, plant and equipment.  Accumulated amortization of the leased equipment at September 30, 2014 was approximately €35,166 ($48,000).  The lease agreement, which had a net present value of €9,168 ($12,000) at December 31, 2013, matured on August 4, 2014.

Note 5.

Calculation of Basic and Diluted Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:

(in thousands, except per share amounts)

Three Months
Ended September 30,

Nine Months
Ended September 30,

2014

 

2013

2014

 

2013

Numerator:

Net Income

 $

296 

 $

113 

 $

1,156 

 $

188 

Numerator for basic earnings per share -
income available to common shareholders

296 

113 

1,156 

188 

Effect of dilutive securities:

Numerator for diluted earnings per share -
income available to common shareholders
after assumed conversions

 $

296 

 $

113 

 $

1,156 

 $

188 

Denominator:

Denominator for basic earnings per share -
weighted-average shares

3,014 

3,012 

3,014 

2,999 

Effect of dilutive securities:

Employee stock options

Warrants

376 

402 

388 

270 

Dilutive potential common shares

380 

410 

389 

272 

Denominator for diluted earnings per share -
weighted-average shares and assumed conversions

3,394 

3,422 

3,403 

3,271 

Basic earnings per common share

 $

0.10 

 $

0.04 

 $

0.38 

 $

0.06 

Diluted earnings per common share

 $

0.09 

 $

0.03 

 $

0.34 

 $

0.06 

For the three and nine month periods ended September 30, 2014 and 2013, approximately 134,000 and 88,000, respectively, of shares issuable upon exercise of employee stock options were excluded from the calculation of diluted earnings per share as the exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

12



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 6.

Segment Information

The Company and its subsidiaries operate in the business of manufacturing flame retardants, engineered fillers and pigments in three geographic segments.  All U.S. manufacturing is done at the facility located in Corpus Christi, Texas.  Foreign manufacturing is done by the Company’s wholly-owned foreign operations, TMM, located in Malaysia and TPT, located in The Netherlands.  A summary of the Company’s manufacturing operations by geographic segment is presented below in thousands:

United States
(Corpus Christi)

Europe
(TPT)

Asia
(TMM)

Inter-Company
Eliminations

Consolidated

As of and for the three months ended:

September 30, 2014

Net Sales:

Customer sales

 $

8,137 

 $

2,341 

 $

839 

 $

 $

11,317 

Intercompany sales

1,936 

2,430 

(4,366)

Total Net Sales

 $

8,137 

 $

4,277 

 $

3,269 

 $

(4,366)

 $

11,317 

Location income (loss)

 $

135 

 $

215 

 $

(201)

 $

147 

 $

296 

September 30, 2013

Net Sales:

Customer sales

 $

7,680 

 $

2,124 

 $

1,066 

 $

 $

10,870 

Intercompany sales

53 

1,674 

1,703 

(3,430)

Total Net Sales

 $

7,733 

 $

3,798 

 $

2,769 

 $

(3,430)

 $

10,870 

Location income (loss)

 $

(389)

 $

353 

 $

80 

 $

69 

 $

113 

As of and for the nine months ended:

September 30, 2014

Net Sales:

Customer sales

 $

24,534 

 $

8,148 

 $

4,159 

 $

 $

36,841 

Intercompany sales

58 

5,903 

6,315 

(12,276)

Total Net Sales

 $

24,592 

 $

14,051 

 $

10,474 

 $

(12,276)

 $

36,841 

Location income (loss)

 $

181 

 $

1,362 

 $

(630)

 $

243 

 $

1,156 

Location assets

 $

21,574 

 $

10,577 

 $

19,888 

 $

 $

52,039 

September 30, 2013

Net Sales:

Customer sales

 $

23,264 

 $

6,300 

 $

3,465 

 $

 $

33,029 

Intercompany sales

110 

4,997 

7,342 

(12,449)

Total Net Sales

 $

23,374 

 $

11,297 

 $

10,807 

 $

(12,449)

 $

33,029 

Location income (loss)

 $

(361)

 $

618 

 $

(113)

 $

44 

 $

188 

Location assets

 $

21,048 

 $

11,305 

 $

            26,268

 $

 $

58,621 

13



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Product sales of inventory between the U.S., Asian and European operations are based on inter-company pricing, which includes an inter-company profit margin.  In the geographic information, the location profit (loss) from all locations is reflective of these inter-company prices, as is inventory at the Corpus Christi location prior to elimination adjustments.  Such presentation is consistent with the internal reporting reviewed by the Company’s chief operating decision maker.  The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period.  To the extent there are net increases/declines period over period in Corpus Christi inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.

Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products.  Intercompany sales consisted of SR, HITOX, ALUPREM and TIOPREM.

Note 7.

Stock Options and Equity Compensation Plan

For the three and nine month periods ended September 30, 2014, the Company recorded stock-based employee compensation expense of $30,000 and $100,000, respectively.  For the three and nine month periods ended September 30, 2013, the Company recorded stock-based employee compensation expense of $23,000 and $85,000, respectively.  This compensation expense is included in the selling, general and administrative expenses in the accompanying condensed consolidated income statements.

The Company granted 20,500 options during the nine month period ended September 30, 2014 and 21,000 options during the same period of 2013.

As of September 30, 2014, there was approximately $403,000 of stock-based employee compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 2.93 years.

As most options issued under the Company’s 2000 Incentive Plan are incentive stock options, the Company does not normally receive significant excess tax benefits relating to the compensation expense recognized on vested options.

 

Note 8.

Inventories

Following is a summary of inventory at September 30, 2014 and December 31, 2013, in thousands:

 

 

 

 September 30,

 

 December 31,

 

 

 

2014

 

2013

Raw materials

 $

13,249 

 $

12,852 

Work in progress

2,119 

1,866 

Finished goods

4,187 

5,306 

Supplies

1,063 

1,034 

Total Inventories

20,618 

21,058 

Inventory reserve

(131)

(305)

Net Inventories

 $

20,487 

 $

20,753 

14



TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 9.

Derivatives and Other Financial Instruments


The Company has exposure to certain risks relating to its ongoing business operations, including financial, market, political and economic risks.  The following discussion provides information regarding our exposure to the risks of changing foreign currency exchange rates.  The Company has not entered into these contracts for trading or speculative purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative purposes in the future.  The foreign exchange contracts are used to mitigate uncertainty and volatility, and to cover underlying exposures.

Foreign Currency Forward Contracts

We manage the risk of changes in foreign currency exchange rates, primarily at our Asian operation, through the use of foreign currency contracts.  Foreign exchange contracts are used to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies, including sales and purchases transacted in a currency other than the functional currency, will be adversely affected by changes in exchange rates.  We report the fair value of the derivatives on our condensed consolidated balance sheets and changes in the fair value are recognized in earnings in the period of the change.

 

At September 30, 2014, we marked these contracts to market, recording $21,000 as a current liability on the condensed consolidated balance sheet.  For the three month and nine month periods ended September 30, 2014, we recorded a net loss on these contracts of $21,000 and a net gain $2,000, respectively, as a component of our net income.  For the three and nine month periods ended September 30, 2013, we recorded a net loss on these contracts of $23,000 and a net gain of $1,000, respectively, as a component of our net income.

 

The following table summarizes the gross fair market value of all derivative instruments, which are not designated as hedging instruments and their location in our condensed consolidated balance sheets at September 30, 2014 and December 31, 2013, in thousands:

 

Liability Derivatives

Derivative Instrument

 

Location

 

September 30, 2014

 

December 31, 2013

Foreign Currency
Exchange Contracts

Accrued Expenses

 $

21 

 $

14 

 


The following table summarizes, in thousands, the impact of the Company’s derivatives on the condensed consolidated income statements for the three and nine month periods ended September 30, 2014 and 2013:

 

 

 

 

Amount of Gain Recognized in Operations

Derivative

 

Location of Gain
(loss) on Derivative

 

 Three Months Ended
September 30,

 

 Nine Month Ended
September 30,

Instrument

 

Instrument

2014

 

2013

2014

 

2013

Foreign Currency
 Exchange Contracts

Gain (loss) on foreign
  currency exchange
  rate

 $

(21)

 $

(23)

 $

 $

15



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

We are a global producer of high performance, specialty mineral products focused on product innovation and technical support.  Our specialty mineral products, which include flame retardant and smoke suppressant fillers, engineered fillers, and TiO2-color hybrid pigments, are designed for use in plastics, coatings, paints and catalysts applications, as well as a wide range of other industrial applications. With operations in the United States, Europe and Asia, our mission is to bring high value products and superior levels of service to our customers to help ensure their success.

Our U.S. operation, located in Corpus Christi, Texas, is also the global headquarters for the Company.  TPT, our European operation, is located in Hattem, Netherlands, and TMM, our Asian operation, is located in Ipoh, Malaysia.  Following is a list of our current specialty mineral products and a brief description of the unique characteristics which lend to the high performance of these specialty products.

ALUPREM®

Premium Alumina Trihydrate (ATH) and Boehmite (AMH) products are produced at our European operation and are designed for the most demanding worldwide applications. In-house engineered surface treatment is available for enhanced performance benefits.

ALUPREM TB and SR Boehmite alumina products are suitable for a broad range of applications including wire and cable, printed circuit boards, catalysts, high-tech polishing, coatings and pigments. Performance benefits include high temperature flame retardant, improved mechanical properties and scratch resistance, good resin compatibility and high brightness.

ALUPREM XHL is specially designed ATH for “Extra High Loading” to meet more stringent flame retardant and smoke suppressant requirements for sheet molding compound (“SMC”), bulk molding compound (“BMC”), pultrusion and other thermoset composite applications.

ALUPREM TA Bayer and TG ultra-white / translucent grade ATH products are designed for color critical applications like Solid Surface and performance driven uses such as wire and cable.

HITOX®

HITOX (high grade titanium dioxide) is a high quality, cost-effective, beige colored titanium dioxide pigment produced at both our U.S. and Asian operations. In products which require opacity and color, HITOX can reduce the amount of expensive organic and inorganic pigments as well as white TiO2. HITOX is used in a broad range of paint and coatings and plastics applications including architectural, coil backers, powder, container, wood, traffic, paper, primers, adhesive and sealants, roof coatings and PVC.

BARTEX® and BARYPREM®

High whiteness and brightness, chemical inertness and controlled particle sizing are features of BARTEX. Barium Sulfate’s high density is one of the primary reasons it is used as a pigment. Suitable for use in both acid and basic conditions, BARTEX gives weight and body to products ranging from powder coatings to rubber products and plastics. BARTEX is also used as an extender pigment in top coats and primers.

16



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 OPTILOAD®

OPTILOAD ATH is specially developed for “Optimum Loading”, offering a halogen-free solution for passing the most stringent flame retardant and smoke suppressant requirements. With increasing legislative concerns over smoke and toxicity associated with older halogenated systems, interest in re-formulation with OPTILOAD is growing.  Produced at our U.S. operation, the low viscosity OPTILOAD series offers high performance in a wide range of thermoset composite applications including SMC, BMC, pultrusion, resin infusion and spray-up / hand lay-up.

HALTEX®

HALTEX ATH is an economical, non-toxic, flame retardant and smoke suppressant filler produced at our U.S. operation for supply to the North American market. HALTEX features tightly controlled particle sizing to meet specific application performance requirements. Quality is suitable for a broad range of uses including electrical components, SMC, BMC, adhesives and sealants, roof coatings, foam insulation and rubber mining belts.

TIOPREM®

TIOPREM is a high performance TiO2 colored hybrid pigment produced at both the U.S. and Asian operations. TIOPREM offers excellent heat stability making it suitable for use in high temperature resins and coatings. Typical applications are plastic master batch, color concentrates and liquid color. TIOPREM exhibits good opacity and is cost-effective in formulation, partially replacing more expensive heat stable pigments as well as white Titanium Dioxide.

Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastics.  This has generally led to higher sales in our second and third quarters due to increases in construction and maintenance during warmer weather.  Also, pigment consumption is closely correlated with general economic conditions.  When the economy is in an expansionary state, there is typically an increase in pigment consumption while a slow down typically results in decreased pigment consumption.  When the construction industry or the economy is in a period of decline, TOR's sales and profit are likely to be adversely affected.

Operating expenses in the foreign locations are primarily in local currencies.  Accordingly, we have exposure to fluctuation in foreign currency exchange rates.  These fluctuations impact the translation of sales, earnings, assets and liabilities from local currency to the U.S. Dollar.

17



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Following are our results for the three and nine month periods ended September 30, 2014 and 2013.

(Unaudited)

(In thousands, except per share amounts)

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

NET SALES

 $

11,317 

 $

10,870 

 $

36,841 

 $

33,029 

Cost of sales

9,809 

9,289 

31,674 

28,242 

GROSS MARGIN

 

1,508 

 

1,581 

 

5,167 

 

4,787 

Technical services and research and development

50 

135 

150 

459 

Selling, general and administrative expenses

1,092 

1,119 

3,319 

3,644 

Loss on disposal of assets

10 

OPERATING INCOME

 

366 

 

327 

 

1,698 

 

674 

OTHER INCOME (EXPENSE):

Interest expense, net

(85)

(103)

(275)

(286)

Gain (Loss) on foreign currency exchange rate

71 

(84)

10 

(151)

Other, net

10 

18 

INCOME BEFORE INCOME TAX

 

357 

 

146 

 

1,443 

 

255 

Income tax expense

61 

33 

287 

67 

NET INCOME

 $

296 

 $

113 

 $

1,156 

 $

188 

 

Results of Operations

Net Sales:  Consolidated net sales increased approximately 4%, or $447,000, and 12%, or $3,812,000, for the three and nine month periods ended September 30, 2014, respectively.  The growth in sales for both the three and nine month periods of 2014 is primarily related to an increase in volume of our specialty mineral products, ALUPREM and BARTEX.

Following is a summary of our consolidated products sales for the three and nine month periods ended September 30, 2014 and 2013 (in thousands).  All inter-company sales have been eliminated.

(Unaudited) 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

Product

2014

2013

Variance

 

2014

2013

Variance

ALUPREM

 $

4,450 

39%

 $

3,432 

32%

 $

1,018 

30%

 $

14,195 

38%

 $

10,456 

32%

 $

3,739 

36%

HITOX

3,425 

30%

3,717 

34%

(292)

-8%

10,569 

29%

11,553 

35%

(984)

-9%

BARTEX /
BARYPREM

2,280 

20%

2,135 

19%

145 

7%

6,926 

19%

6,180 

19%

746 

12%

HALTEX /
OPTILOAD

750 

7%

877 

8%

(127)

-14%

2,491 

7%

2,627 

8%

(136)

-5%

TIOPREM

215 

2%

408 

4%

(193)

-47%

716 

2%

1,555 

4%

(839)

-54%

SYNTHETIC
RUTILE

0%

96 

1%

(96)

100%

1,365 

4%

96 

<1%

1,269 

1322%

OTHER

197 

2%

205 

2%

(8)

-4%

579 

1%

562 

2%

17 

3%

Total

 $

11,317 

100%

 $

10,870 

100%

 $

447 

4%

 $

36,841 

100%

 $

33,029 

100%

 $

3,812 

12%

18



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 ALUPREM sales increased 30% for the three month period ended September 30, 2014 and 36% for the nine month period ended September 30, 2014, primarily related to an increase in volume and selling price.  For the third quarter, volume and selling price increased approximately 20% and 10%, respectively, and for the nine month period volume and selling price increased approximately 25% and 11%, respectively.

HITOX sales decreased 8% and 9% for both the three and nine month periods ended September 30, 2014, respectively, primarily due to the weakness in the global TiO2 market, as well as the entry into the TiO2 market by producers of white TiO2 in China.  For the third quarter of 2014, volume and selling price decreased approximately 5% and 3%, respectively, and for the nine month period ended September 30, 2014, volume decreased approximately 2% and selling price decreased approximately 7%.

BARTEX/BARYPREM sales increased 7% and 12% during the three and nine month periods ended September 30, 2014, respectively.  For the three and nine month periods, volume increased approximately 5% and 11%, respectively, and selling price accounted for approximately 2% and 1%, respectively.

HALTEX/OPTILOAD sales decreased 14% and 5% for the three and nine month periods ended September 30, 2014, respectively.  For the quarter ended September 30, 2014, volume decreased approximately 22% and product mix resulted in an increase of approximately 8%.  The year to date decline consisted of a decrease in volume of approximately 7% which was partially offset by a change in product mix resulting in an increase of approximately 2%.

TIOPREM sales decreased 47% and 54% for the three and nine month periods ended September 30, 2014, respectively.  Volume decreased 34% during the third quarter of 2014 and the selling price decreased 13%.  For the year to date period, sales volume decreased 48% and the selling price decreased 6%.

Synthetic Rutile (“SR”) represented approximately 4% and less than 1% of our overall sales during the nine month periods ended September 30, 2014 and 2013, respectively.  While producers of white TiO2 in China have contributed to the overall weakness in the global TiO2 market, historically, we have not sold SR on a regular basis to third-party customers.  Our SR is typically produced for our own internal consumption.  We did not sell SR during the third quarter of 2014; whereas, SR sales to third parties accounted for approximately 1% of the total consolidated sales during the third quarter of 2013.

19



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

U.S. Operations

Our U.S. operation manufactures and sells HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM to third-party customers.  In addition, we purchase ALUPREM and HITOX from our subsidiaries, TPT and TMM, for distribution in the Americas.  Following is a summary of net sales for our U.S. operation for the three and nine month periods ended September 30, 2014 and 2013 (in thousands), as well as a summary of the material changes.  All inter-company sales have been eliminated.

(Unaudited) 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

Product

2014

2013

Variance

 

2014

2013

Variance

ALUPREM

 $

2,760 

34%

 $

2,012 

26%

 $

748 

37%

 $

8,239 

34%

 $

6,256 

27%

 $

1,983 

32%

HITOX

2,361 

29%

2,438 

32%

(77)

-3%

7,017 

29%

7,458 

32%

(441)

-6%

BARTEX

1,908 

24%

1,823 

24%

85 

5%

5,615 

23%

5,105 

22%

510 

10%

HALTEX /
OPTILOAD

750 

9%

877 

11%

(127)

-14%

2,491 

10%

2,627 

11%

(136)

-5%

TIOPREM

168 

2%

365 

5%

(197)

-54%

614 

2%

1,337 

6%

(723)

-54%

OTHER

190 

2%

165 

2%

25 

15%

558 

2%

481 

2%

77 

16%

Total

 $

8,137 

100%

 $

7,680 

100%

 $

457 

6%

 $

24,534 

100%

 $

23,264 

100%

 $

1,270 

5%

ALUPREM sales in the U.S. increased 37% and 32% for the three and nine month periods ended September 30, 2014, respectively.  The increase in U.S. ALUPREM sales for the three and nine month periods ended September 30, 2014 is due to an increase in volume of a significant customer.

HITOX sales decreased 3% for the three month period ended September 30, 2014, due to a decrease in volume of 3% as compared to the same period of 2013, primarily related to the continued weakening of the TiO2 market which is driving down the global demand of TiO2 products.  For the nine month period ended September 30, 2014, the 6% decrease in HITOX sales was primarily related to a decrease in selling price and volume of approximately 3% each.

BARTEX sales increased 5% and 10% the three and nine month periods ended September 30, 2014, respectively.  For the third quarter of 2014, volume and selling price increased approximately 4% and 1%, respectively; and for the nine month period ended September 30, 2014, the increase in volume of 11% was partially offset by a decrease due to product mix of 1%.

TIOPREM sales in the U.S. decreased 54% during both the three and nine month periods ended September 30, 2014.  For the third quarter of 2014, volume decreased 40% and selling price decreased 14%; and for the nine month period ended September 30, 2014, volume decreased 48% and selling price decreased sales 6%.

20



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

European Operations

Our subsidiary in The Netherlands, TPT, manufactures and sells ALUPREM to third-party customers, as well as to our U.S. operation for distribution to U.S. customers.  In addition, TPT purchases HITOX from TMM for distribution in Europe.  The following table represents TPT’s sales (in thousands) for the three and nine month periods ended September 30, 2014 and 2013 to third-party customers.  All inter-company sales have been eliminated.

(Unaudited) 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

Product

2014

2013

Variance

 

2014

2013

Variance

ALUPREM

 $

1,690 

72%

 $

1,420 

67%

 $

270 

19%

 $

5,956 

73%

 $

4,200 

67%

 $

1,756 

42%

BARYPREM

372 

16%

312 

17%

60 

19%

1,311 

16%

1,075 

15%

236 

22%

HITOX

253 

11%

370 

15%

(117)

-32%

805 

10%

952 

17%

(147)

-15%

TIOPREM

26 

1%

22 

1%

18%

76 

1%

73 

1%

4%

Total

 $

2,341 

100%

 $

2,124 

100%

 $

217 

10%

 $

8,148 

100%

 $

6,300 

100%

 $

1,848 

29%

ALUPREM sales in Europe increased 19% for the three month period ended September 30, 2014, primarily due to product mix of 27% which was partially offset by a decrease in volume of approximately 8%.  For the nine month period ended September 30, 2014, ALUPREM sales increased 42% primarily due to an increase in volume of 17%, product mix of 24% and the impact of the change in the foreign currency rate of approximately 1%.  The increase in volume and product mix is primarily related to our continued development of new high performance, specialty mineral products, as well as our focus on product innovation and technical support which has enabled TPT to grow its customer base.

BARYPREM sales in Europe increased 19% for the three month period ended September 30, 2014, primarily due to an increase in volume and selling price of approximately 15% and 4%, respectively.  For the nine month period ended September 30, 2014, sales increased 22%, primarily due to an increase in volume, selling price and the impact of the change in the foreign currency rate of approximately 13%, 8% and 1%, respectively. 

HITOX sales in Europe decreased 32% for the third quarter of 2014, primarily due to a decrease in volume of approximately 30% and selling price of approximately 2%.  For the nine month period ended September 30, 2014, HITOX sales decreased approximately 15%, primarily due to a decrease in volume and selling price of approximately 12% and 3%, respectively.  The European HITOX sales continue to be impacted by the overall weakness in the global TiO2 market.

TIOPREM sales in Europe increased 18% during the third quarter of 2014, primarily due to an increase in volume.  For the nine month period ended September 30, 2014, TIOPREM sales increased approximately 4%, primarily due to product mix.

21



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Asian Operations

Our subsidiary in Malaysia, TMM, manufactures and sells HITOX and SR to third-party customers, as well as to our U.S. operation and TPT.  The following table represents TMM’s sales (in thousands) for the three and nine month periods ended September 30, 2014 and 2013 to third-party customers.  All inter-company sales have been eliminated.

(Unaudited) 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

Product

2014

2013

Variance

 

2014

2013

Variance

HITOX

 $

811 

97%

 $

909 

85%

 $

(98)

-11%

 $

2,747 

66%

 $

3,143 

91%

 $

(396)

-13%

TIOPREM

21 

2%

21 

2%

0%

26 

1%

145 

4%

(119)

-82%

SYNTHETIC
RUTILE

0%

96 

9%

(96)

0%

1,365 

33%

96 

3%

1,269 

100%

OTHER

1%

40 

4%

(33)

-83%

21 

> 1%

81 

2%

(60)

-74%

Total

 $

839 

100%

 $

1,066 

100%

 $

(227)

-21%

 $

4,159 

100%

 $

3,465 

100%

 $

694 

20%

HITOX sales in Asia decreased 11% and 13% for the three and nine month periods ended September 30, 2014, respectively, primarily due to a decrease in selling price.  The HITOX market in Asia continues to decline due to the weakness in the TiO2 market, as well as the entry into the TiO2 market by producers of white TiO2 in China.

TIOPREM sales in Asia were flat for the three month periods ended September 30, 2014 and 2013.  For the nine month period ended September 30, 2014 sales decreased 82%, primarily due to a volume and selling price decrease of approximately 79% and 3%, respectively.

SR represented 33% and 3% of TMM’s overall sales during the nine month periods ended September 30, 2014 and 2013.  While producers of white TiO2 in China have contributed to the overall weakness in the global TiO2 market, historically, we have not sold SR on a regular basis to third-party customers.  Our SR is typically produced for our own internal consumption.  We did not sell SR during the third quarter of 2014; whereas, SR sales to third parties accounted for approximately 9% of the TMM’s overall sales during the third quarter of 2013.

22



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Other Consolidated Results

Gross Margin:  The following table represents our net sales, cost of sales and gross margin for the three and nine month periods ended September 30, 2014 and 2013, in thousands.

(Unaudited)

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

NET SALES

 $

11,317 

 $

10,870 

 $

36,841 

 $

33,029 

Cost of sales

9,809 

9,289 

31,674 

28,242 

GROSS MARGIN

 $

1,508 

 $

1,581 

 $

5,167 

 $

4,787 

GROSS MARGIN %

13.3%

14.5%

14.0%

14.5%

For the three month period ended September 30, 2014, gross margin decreased approximately 2%.  The primary factor influencing the decrease in gross margin was related to the SR plant at TMM being idle for one month during the third quarter of 2014, whereas, it was in operation the entire three months of the third quarter of 2013.

For the nine month period ended September 30, 2014, the gross margin remained flat at 14%.

Selling, General, Administrative and Expenses (“SG&A”):  SG&A expense decreased approximately 2% during the three month period ended September 30, 2014, primarily due to a decrease in salaries and travel of approximately 4% and 3%, respectively, which were partially offset by an increase in various SG&A expenses of 5%.

For the nine month period ended September 30, 2014, SG&A expenses decreased approximately 9%, primarily due to a decrease in salaries and selling expense of approximately 9% and 4%, respectively, which were partially offset by an increase in various SG&A expenses of 4%.

Interest Expense:  Net interest expense decreased approximately $18,000 for the third quarter of 2014 and approximately $11,000 for the nine month period ended September 30, 2014, as compared to the same periods of 2013, primarily due to a decrease in our long and short-term financing at each of the three operations.

Income Taxes:  Income taxes consisted of federal and state income tax expense of approximately $163,000 and $2,000, respectively, and foreign tax benefit of approximately $104,000 for the three month period ended September 30, 2014, as compared to a federal tax benefit of approximately $103,000 and state income tax expense of approximately $2,000 and foreign tax expense of approximately $134,000 for the same three month period in 2013.

For the nine month period ended September 30, 2014, income taxes consisted of federal and state income tax expense of approximately $220,000 and $7,000, respectively, and foreign tax expense of approximately $60,000, as compared to a federal tax benefit of approximately $88,000 and state income tax expense of approximately $7,000 and foreign tax expense of approximately $148,000 for the same nine month period in 2013.  Taxes are based on an estimated annualized consolidated effective rate of 19.9% for the year ended December 31, 2014.

23



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity, Capital Resources and Other Financial Information

Long-term Debt – Financial Institutions

Following is a summary of our long-term debt to financial institutions as of September 30, 2014 and December 31, 2013, in thousands:

 September 30,

2014

 December 31,

 (Unaudited)

2013

Fixed Rate term note payable to a U.S. bank, with an interest rate of 5.5% at September 30, 2014, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of our U.S. operation.

 $

595 

 $

911 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.85% at September 30, 2014, due July 1, 2029, secured by TPT's land and office building purchased July 2004.  (€240)

304 

351 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.3% at September 30, 2014, due January 31, 2030, secured by TPT's land and building purchased January 2005.  (€266)

337 

386 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2014, due July 31, 2015, secured by TPT's assets.  (€21)

26 

80 

Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.25% at September 30, 2014. Paid in full on June 30, 2014.

139 

Malaysian Ringgit term note payable to a Malaysian bank, with a fixed interest rate of 5.2% at September 30, 2014, due March 1, 2015, secured by TMM's property, plant and equipment. (RM 1,750)

533 

801 

Malaysian Ringgit term note payable to a Malaysian bank, with a fixed interest rate of 5.2% at September 30, 2014, due October 25, 2018, secured by TMM's property, plant and equipment. (RM 4,500)

1,372 

1,290 

Total

3,167 

3,958 

Less current maturities

1,159 

1,040 

Total long-term debt - financial institutions

 $

2,008 

 $

2,918 

24



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 Short-term Debt

U.S. Operations

On December 31, 2010, the Company entered into a credit agreement, as amended, (the “Agreement”) with American Bank, N.A. (the “Lender”) which established a $1,000,000 line of credit (the “Line”), and on March 1, 2012, the Line was increased from $1,000,000 to $2,000,000.  On May 15, 2013, the Company and the Lender entered into the second amendment which reduced the minimum interest rate floor on the Line from 5.5% to 4.5%.  

 

On January 14, 2014, the Company entered into the third amendment (the “Third Amendment”) with the Lender.  Under the terms of the Third Amendment, the Company is required to maintain a ratio of cash flow to debt service of 1.0 to 1.0 for the four month period ended April 30, 2014, six month period ending June 30, 2014, nine month period ending September 30, 2014, and twelve month period ending December 31, 2014.  Thereafter, the required ratio of cash flow to debt service shall be 1.25 to 1.0 measured on a rolling four quarter basis as originally detailed in the Agreement.  The Company was in compliance with the ratio of cash flow to debt service for  the nine month period ended September 30, 2014.

 

On August 1, 2014, the Company and the Lender entered into the fourth amendment which extended the maturity date on the Line from October 15, 2014 to October 15, 2015 and released as collateral the $350,000 certificate of deposit pledged as additional security in the Third Amendment to the agreement.  Under the terms of the Agreement, as amended, the amount the Company is entitled to borrow under the Line is subject to a defined borrowing base, which is based on the Company’s eligible accounts receivable and inventory.  Amounts advanced under the Line bear interest at a variable rate equal to one percent per annum point above the Wall Street Journal Prime Rate as such prime rate changes from time to time, with a minimum floor rate of 4.5%.  At September 30, 2014, no funds were outstanding on the Line.

European Operations

On March 20, 2007, our subsidiary, TPT, entered into a short-term credit facility (the “Credit Facility”) with Rabobank which increased TPT’s line of credit from €650,000 to €1,100,000.  The Credit Facility was renewed on January 1, 2010 and has no stated maturity date.  The Credit Facility, which has a variable interest rate of bank prime plus 2.8% (currently at 3.316%), is secured by TPT’s accounts receivable and inventory.  At September 30, 2014, TPT had utilized €53,000 ($67,000) of its short-term Credit Facility.

TPT’s loan agreements covering both the Credit Facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of Rabobank, there are adverse changes in our business.  We believe that such subjective acceleration clauses are customary in The Netherlands for such borrowings.  However, if demand is made by Rabobank, we may be unable to refinance the demanded indebtedness, in which case Rabobank could foreclose on the assets of TPT.

25



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Asian Operations

On August 31, 2014, our subsidiary, TMM, amended its banking facility with HSBC Bank of Malaysia Berhad (“HSBC”) to extend the maturity date from April 30, 2014 to June 30, 2015.  The HSBC facility includes the following in RM:  (1) overdraft of RM 500,000 ($152,000); (2) an import/export line (“ECR”) of RM 10,460,000 ($3,188,000); and (3) a foreign exchange contract limit of RM 5,000,000 ($1,524,000.

On August 25, 2014, TMM amended its banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date from March 24, 2014 to April 1, 2015.  The RHB facility includes the following:  (1) an overdraft line of credit up to RM 1,000,000 ($304,000); (2) an ECR of RM 7,300,000 ($2,225,000); (3) a bank guarantee of RM 1,200,000 ($365,000); and (4) a foreign exchange contract limit of RM 25,000,000 ($7,621,000).  At September 30, 2014, the outstanding balance on the foreign exchange contract was RM 1,172,000 ($357,000) at a current interest rate of 2.20%.

The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad.  The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments.  At September 30, 2014, the outstanding balance on the ECR facilities was RM 7,645,000 ($2,330,000) at a current interest rate of 5.2%.

The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time.  We believe such a demand provision is customary in Malaysia for such facilities.  The loan agreements are secured by TMM’s property, plant and equipment.  However, if demand is made by HSBC or RHB, we may be unable to refinance the demanded indebtedness, in which case, the lenders could foreclose on the assets of TMM.  The credit facilities prohibit TMM from paying dividends, and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.

26



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cash and Cash Equivalents

As noted on the following table, cash and cash equivalents decreased $184,000 for the nine months ended September 30, 2014 as compared to a decrease of $1,000,000 for the nine months ended September 30, 2013, in thousands.

(Unaudited)

Nine Months Ended September 30,

 

2014

 

2013

Net cash provided by (used in)

Operating activities

 $

4,608 

 $

(1,447)

Investing activities

(1,386)

(3,527)

Financing activities

(3,208)

4,102 

Effect of exchange rate fluctuations

(198)

(128)

Net decrease in cash and cash equivalents

 $

(184)

 $

(1,000)

Operating Activities

Operating activities provided cash of $4,608,000 during the first nine months of 2014 as compared to using cash of $1,447,000 during the same period of 2013.  Following are the major changes in working capital affecting cash used by operating activities for the nine month period ended September 30, 2014:

·        Accounts Receivable:  Accounts receivable increased $1,411,000 during the first nine months of 2014.  The increase in accounts receivable is primarily due to stronger sales in the third quarter of 2014 compared to the fourth quarter of 2013.  Accounts receivable increased $1,810,000 at the U.S. operation and $219,000 at TPT and decreased $618,000 at TMM.

·        Inventories: Inventories decreased $343,000 during the first nine months of 2014.  Inventories at the U.S. operation increased $1,763,000, primarily related to an increase in raw materials.  TPT’s inventory increased approximately $123,000, primarily related to an increase in raw materials and TMM’s inventory decreased approximately $2,229,000, primarily related to a decrease in raw materials.

·        Other Current Assets:  Other current assets increased $381,000 during the first nine months of 2014.  Prepaid expenses at the U.S. operation increased $102,000, primarily related to the timing of insurance premiums, TPT’s increased $233,000, primarily due to the prepayment of payroll taxes, deposits on equipment parts and timing of insurance premiums and TMM’s increased $46,000, primarily due to the timing of deposits paid on equipment.

·        Accounts Payable and Accrued Expenses:  Trade accounts payable and accrued expenses increased $2,223,000 during the first nine months of 2014.  Accounts payable and accrued expenses at the U.S. operation increased $400,000, primarily related to the timing of raw material purchases; TPT’s increased $953,000, primarily related to capital expenditures and an increase in tax accruals; and TMM’s increased $870,000, primarily due to the timing of SR production.

27



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Investing Activities

We used cash of $1,386,000 in investing activities during the first nine months of 2014, primarily for the purchase of fixed assets as compared to $3,527,000 during the same period 2013.  Net investments for each of our three locations are as follows:

  • ·       U.S. Operation:  We invested approximately $320,000 and $645,000 in 2014 and 2013, respectively, primarily related to capital maintenance and production equipment.

  • ·       European Operation:  We invested approximately $834,000 and $974,000 in 2014 and 2013, respectively, for new equipment to increase the production capacity of ALUPREM.

  • ·       Asian Operation:  We invested approximately $232,000 and $1,908,000 in 2014 and 2013, respectively, primarily related to improved efficiency and yield of SR production.

Financing Activities

Financing activities used cash of $3,208,000 during the nine month period ended September 30, 2014 as compared to providing cash of $4,102,000 for the same period 2013.  Significant factors relating to financing activities include the following:·       

  • Lines of Credit

·        U.S. Operation:  Borrowings on our U.S. line of credit were not utilized by the Company during the nine month period ended September 30, 2014, as compared to an increase of $700,000 during the first nine months of 2013.

·        European Operation:  Borrowings on TPT’s line of credit decreased $923,000 during the nine month period ended September 30, 2014, as compared to an increase of $195,000 during the same period of 2013.

·        Asian Operation:  Borrowings on TMM’s line of credit decreased $42,000 during the nine month period ended September 30, 2014, as compared to a decrease of $91,000 during the same period of 2013.

  • Export Credit Refinancing Facility (ECR):  TMM’s borrowing on the ECR decreased $1,532,000 during the nine month period ended September 30, 2014, as compared to an increase of $3,600,000 for the same period in 2013.

  • Capital Leases:  Capital leases decreased approximately $11,000 during the first nine months of 2014 as compared to a decrease of approximately $30,000 for the same period in 2013.

  • Long-term Debt: 

·        U.S. Operation:  Our U.S. long-term debt decreased $316,000 and $296,000 for the nine month periods ended September 30, 2014 and 2013, respectively.

·        European Operation:  TPT’s long-term debt decreased $211,000 and $326,000 for the nine month periods ended September 30, 2014 and 2013, respectively.

·        Asian Operation:  TMM’s long-term debt decreased $184,000 for the nine month period ended September 30, 2014 and increased $83,000 for the nine month period ended September 30, 2013.

Proceeds from Issuance of Common Stock:  We received $11,000 from the issuance of common stock during the first nine months of 2014 related to the exercise of stock options.  For the same nine month period of 2013, we received $267,000 from the issuance of common stock related to the exercise of stock options.

28



TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Off-Balance Sheet Arrangements and Contractual Obligations

No material changes have been made to the “Off-Balance Sheet Arrangements and Contractual Obligations” noted in the Company’s 2013 Annual Report on Form 10-K except as noted above.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms; and (ii) to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

During the last fiscal quarter, there were no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

29



Part II  -  Other Information

Item 6.

Exhibits

(a)

Exhibits

Exhibit 10.1

Amendment to Agreement with RHB Bank, dated August 15, 2014

Exhibit 10.2

Amendment to Agreement with HSBC Bank, dated August 31, 2014

Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1

Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2

Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Signatures:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TOR Minerals International, Inc.

 

____________

(Registrant)

Date:

November 5, 2014

OLAF KARASCH
Olaf Karasch
President and Chief Executive Officer

Date:

November 5, 2014

BARBARA RUSSELL
Barbara Russell
Chief Financial Officer

30